TRADING WEEKS: Meat Prices Go Hog-Wild

Friday, March 21, 2014

Meat Prices Go Hog-Wild

A Shrinking Meat Supply

As Agweb informs us, fears shrinking meat supplies have sent both the prices for cattle and hogs into the stratosphere recently:

“Cattle futures rose to a record as ranchers struggle to boost the U.S. herd from a 63-year low, and hogs climbed to a 34-month high after a virus that kills piglets spread, spurring concerns that meat supplies will shrink.

Beef output in the U.S., the world’s top producer, will fall 5.3 percent this year to 24.35 billion pounds, the lowest since 1994, the Department of Agriculture has forecast. At the start of this year, the cattle herd fell to 87.7 million head, the lowest since 1951, following drought and high feed costs. Porcine epidemic virus has killed more than 4 million pigs, according to an industry group.

This month, the USDA lowered its 2014 forecast for red-meat production and boosted the outlook for cattle and hog costs. Higher meat prices will raise expenses for retailers, while grocery shoppers will pay as much as 3.5 percent more for meat this year, compared with a 1.2 percent increase in 2013, the government projects.

"Total beef production is going to be down, and that’s one of the few commodities that we’re projected to see the supplies tighten this next year," Don Roose, the president of U.S. Commodities Inc. in West Des Moines, Iowa, said in a telephone interview. "In hogs and the cattle, the supplies are expected to continue to stay tight all the way into the spring. Funds are piling into the long side."

(emphasis added)

There can be no doubt of course that concerns about tighter supplies have strongly supported the recent rally in prices. And yet, this is certainly not the first time that parts of the food industry were plagued with supply concerns. Events like those described above, such as droughts and illnesses befalling herds happen quite frequently. So we are left to wonder whether prices would have also attained the truly dizzying heights recently recorded in the absence of money printing by the central bank. We would suggest the answer to this question is clearly no.

Below we show both the daily active futures charts of lean hogs, live cattle and feeder cattle, as well as 25 year long term charts of their respective prices immediately below the daily charts. As can be seen, prices have never been this high and the recent advances have been huge in the historical context. Luckily for the government, food prices are excluded from the 'core' inflation measure, so the undoubtedly higher grocery bills of consumers won't rudely intrude on the fiction that money printing has no effect on prices.

Moreover, even headline CPI is unlikely to reflect these moves in prices, due to the substitution trick: instead of comparing apples to apples (or in this case, beef to beef), the government simply assumes that consumers will buy less of what has increased in price and therefore will reduce its weight in the basket of goods in favor of goods the prices of which have risen less. It is a very neat way of pulling the wool over everyone's eyes. There may for example be a smaller weighting given to beef, replaced by a higher weighting for chicken. Should chicken prices and other meat prices also rise, consumers will one day presumably be assumed to be eating cat food.

Always keep in mind though that 'CPI' and other 'price index' measures are nonsensical anyway. The mythical aggregate 'price level' does not exist: there is no objective standard by which prices can be measured, as money itself is subject to supply and demand as well. Supply and demand are thus relevant both from the goods and the money side. There is no 'fixed' item that could serve as a yardstick for measurement. Nevertheless, it is of course true that the purchasing power of money changes over time – it is merely not possible to isolate the extent to which price movements are due to influences from the goods side and from the money side. All we know with apodictic certainty is that without fractional reserve banking and central banks, prices would be orders of magnitude lower than they actually are.

The Charts

Let us move on to the chart of meat prices, starting with hogs:

Lean hogs, June contract, daily: hog prices go hog-wild – click to enlarge.

A 25 year chart of lean hogs prices. Prices are at a record high – click to enlarge.

Live Cattle, daily (June contract) – recently cattle prices attained a new all time high as well – click to enlarge.

Live cattle, long term – prices over the past 25 years – click to enlarge.

Feeder Cattle daily, May contract. Here too a new all time high as recently been recorded – click to enlarge.

Feeder cattle long term – the past 25 years. A decade ago, no-one would have thought that today's prices would be seen in just ten years time – click to enlarge.